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Fabless semiconductor company Mellanox Technologies Ltd. (MLNX - Snapshot Report) reported first quarter 2013 loss of 14 cents per share (including stock-based compensation), deteriorating from 34 cents per share earned in the year-ago quarter. However, loss per share was narrower than the Zacks Consensus Estimate of a loss of 20 cents. 

On non-GAAP basis, earnings per share were 10 cents compared with 51 cents per share in the year-ago quarter.

Quarter Details

Total revenue for the quarter was down 6.4% year over year to $83.1 million. Reported revenue beat the Zacks Consensus Estimate of $81.0 million. Hewlett-Packard Co. (HPQ - Analyst Report) with 16% and International Business Machines Corp (IBM - Analyst Report) with 19% were the two customers who accounted for 35% of the total revenue.

Non-GAAP gross profit was down 8.9% from the year-ago quarter to $56.6 million, primarily due to lower revenue base. Gross margin for the quarter stood at 68.1% compared with 70.0% in the year-ago quarter. Including stock-based compensation, gross profit came in at $56.1 million.

Non-GAAP operating expenses jumped 31.7% year over year to $51.7 million. This was primarily due to a sharp rise in research & development (up 30.5% year over year), sales & marketing (up 29.2% year over year) and general & administrative expense (up 46.2% year over year) in the quarter.

Non-GAAP operating profit for the quarter was $4.9 million down from $22.8 million in the year-ago quarter, primarily due to higher operating expenses. Operating margin was down from 25.7% in the year-ago quarter to 5.8%. Including stock-based compensation, Mellanox reported operating loss of $5.5 million.

Non-GAAP net income was down from $22.0 million in the year-ago quarter to $4.3 million. Including stock-based compensation, net loss came in at $6.1 million.

Balance Sheet

Mellanox exited the quarter with $396.2 million in cash and investments versus $426.3 million in the previous quarter. Cash used in operations was $6.6 million compared with $24.5 million cash provided by operations in the previous quarter.

Guidance

For the second quarter of 2013, total revenue is projected in the range of $92.5 million to $97.5 million and gross margin in the range of 68% to 69%. Operating expenses are expected to increase 10.0% to 11.0% on a sequential basis.

Recommendation

Mellanox reported tepid first quarter results and also provided tepid revenue guidance on a year-over-year basis. However, we believe that Mellanox’s product offerings such as InfiniBand products and Ethernet solutions will help the company to drive top-line growth.

However, sluggish macroeconomic environment, and increasing competition from its peers such as QLogic (QLGC - Analyst Report) may act as headwinds going forward. Moreover, customer concentration could be another headwind for the stock.

Currently, Mellanox has a Zacks Rank #2 (Buy).

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